Acquiring a second home in Ontario entails specific down payment and insurance requirements. If you’re considering purchasing a cottage or another type of second home through Freedom Capital, it’s essential to be aware of the applicable down payment guidelines. Let’s explore the factors that influence down payment requirements.
Minimum Down Payment
To secure a mortgage for a second property in Ontario with Freedom Capital, you’ll need to provide a minimum down payment of 5%.
The minimum down payment for a second home in Ontario is based on the home’s value. If the home is valued at $500,000 or less, the minimum down payment is 5%. For instance, if the home costs $200,000, your minimum down payment would be $10,000.
If the property’s value exceeds $500,000 but is less than $1,000,000, a different calculation is required. First, you’ll need to factor in 5% of the initial $500,000, resulting in $25,000 (500,000 * 0.05 = 25,000). Next, you must pay 10% of the remaining balance. Properties priced at $1,000,000 or higher generally require a minimum down payment of 20%.
For example, let’s say the home you’re purchasing is priced at $700,000:
You’ll pay $25,000 for the first $500,000 of the home.
Additionally, you’ll pay 10% of the remaining $200,000, which amounts to an extra $20,000.
Therefore, a new home valued at $700,000 would necessitate a down payment of $45,000.
Mortgage Insurance
Mortgage insurance is another factor to consider when calculating the cost of a new mortgage. Its purpose is to protect lenders in case borrowers fail to meet their repayment obligations, often referred to as mortgage default insurance.
To qualify for mortgage default insurance, borrowers need to meet the insurer’s minimum credit score profile and adhere to a maximum Gross Debt Service (GDS) and Total Debt Service (TDS) ratio, which cannot be negotiated. If you’re self-employed and have insufficient declared income, substantial existing debt, or a low credit score, you may not qualify for mortgage default insurance. In such cases, you would need to provide a down payment of at least 20% or explore the possibility of working with a private lender. .
Opting for the minimum down payment will require you to purchase mortgage insurance. The only way to avoid mortgage insurance is by making a down payment of 20% or more.
In some cases, lenders may not require mortgage default insurance if the down payment is less than 20%. However, this is primarily applicable to private lenders who would approve mortgages with a loan-to-value ratio higher than 80%.
Cost of Mortgage Insurance
Mortgage default insurance from CMHC, Sagen, and Canada Guaranty typically costs approximately 3% to 4% of the mortgage’s value. Borrowers are responsible for paying the insurance premium in full at the beginning of the mortgage term.
CMHC and the other two insurance providers mentioned are the main mortgage default insurance providers in Canada. This insurance is mandatory for all mortgages in Canada with a down payment of less than 20%. While it adds an extra cost for homebuyers, it enables them to purchase first or second homes with more affordable down payments. Without CMHC and similar insurers, mortgages with low down payments would have higher interest rates and limited availability through specific private lenders in certain areas.
Advantages of a Larger Down Payment
Even if you qualify for a very low down payment, there are several benefits to making a larger one.
A larger down payment reduces the perceived risk for lenders, resulting in more favorable interest rates. Once you surpass a 25% down payment, you may qualify for lenders’ lowest rates in many cases. The ideal down payment amount varies among lenders, and some may require up to 35% to access their best rates.
In addition to better rates, larger down payments eliminate the need for mortgage insurance and generally lower your monthly mortgage payments. They also reduce the overall interest paid over the mortgage’s amortization period, saving you money.
Implications of Low Down Payments
Down payments of less than 20% are considered below average. In theory, lenders accepting such small down payments face higher risk. However, CMHC insurance changes the risk dynamic.
Because lenders are protected in case of default, low down payment mortgages are less risky for them. With reduced risk, lenders can often offer better rates for insured mortgages. However, borrowers need to assess the costs of insurance against the expenses associated with an uninsured loan.
Standard 20% Down Payment
A down payment of 20% is the threshold for mandatory mortgage default insurance, including CMHC insurance. Therefore, it’s the minimum down payment that can be made without insurance and without potentially turning to a private lender. Lenders assume a higher level of risk with a 20% down payment compared to a 30% down payment. Down payments exceeding 30% do not provide additional benefits in terms of risk reduction for both lenders and borrowers.
Down payments around the 20% mark may be slightly more costly due to this risk factor. Nevertheless, a 20% down payment remains the standard for mortgages and is generally preferable to most lower alternatives offered by B-lenders, such as Credit Unions and Trust Companies. Down payments slightly below 20% can result in significantly higher costs for borrowers. Many borrowers find it more advantageous to pay 20% upfront and gradually repay the remaining mortgage amount.
Lastly, a 20% down payment is the cutoff for a 30-year amortization. Down payments below 20% render a 30-year amortization unavailable, which leads to higher monthly payments. Insured mortgages can only be amortized over a maximum of 25 years.
Next Steps
If you’re seeking the right mortgage with an appropriate down payment for a second home through Freedom Capital, we are here to help. We assist individuals and families in Ontario by providing expert advice and guidance in finding the right mortgage solutions. Our goal is to secure the lowest rates for a loan that aligns with your personal needs. Contact us today to begin the process of financing your second home.
